Britain mulls windfall tax on oil firms

It's an idea that is tempting politicians the world over, from Barack Obama to China's rulers and Indian parliamentarians.

Now, the notion of a windfall tax on energy companies to pay for increasing fuel costs borne by poor people is catching on in Britain, where a growing cohort of legislators in the ruling Labour Party is calling for action from Prime Minister Gordon Brown.

It looks like an alluring proposition. Slumping in the polls, Mr. Brown is seeking measures that would pep up his popularity and help struggling Britons cope with the economic downturn. A recent survey found two-thirds of the public favor the idea of hitting Big Oil and energy utilities with a one-time levy to help fund those facing a winter of skyrocketing fuel bills.

But the windfall tax proposals are highly controversial. Supporters say it's only fair that those who have benefited from runaway global oil prices should give something back. Critics say it's a subversion of the very idea of a capitalist market system and point out that no other industry is punished this way. Nor, they say, is Big Oil bailed out when oil prices tumble.

For Brown the more immediate concern is the large group of his own MPs (members of parliament) calling on him to act. At least 80 (enough to make trouble in parliament) have signed a petition, and the issue will loom large over a crucial Labour Party conference later this month, which could be a make or break moment for Britain's prime minister.

'Immoral wages' for CEOs?

Lindsay Hoyle, an MP behind the petition, concedes that companies should have a right to make a profit. "But these are excessive profits and immoral wages being paid to chief executives," he says. A windfall tax is necessary, he says, because "what we are talking about is whether people can have their heating on as we go into winter."

He argues that even though oil prices have retreated sharply from peaks above $140 a barrel, utility companies are still raising prices. Key providers have recently told customers that prices will rise by a third or more as winter approaches.

"There is a credit crunch and we all have to tighten our belts, but [firms] are tightening other people's belts."

The energy industry is protesting that the move would unjustly penalise companies, discourage investors at a time when billions are needed to upgrade energy infrastructure, and unfairly intervene in the normal risk-reward capitalist paradigm.

"The impact of higher energy bills is a problem, but, in today's volatile political environment, we need to think more carefully about how we solve it," says David Porter, chief executive of the Association of Electricity Producers. "A windfall tax would be neither just, nor sensible. It would also send out a very negative signal to investors."

The issue drives at the heart of a fundamental question about capitalist democracies: To whom is a company answerable? The answer is normally those who underwrite its risk – the shareholders. And indeed, if a retailer or restaurant chain suddenly landed in good times with profits soaring, few would call for a windfall tax on them.

Energy is different, claim windfall tax proponents. First, it benefits from factors that have nothing to do with good management, entrepreneurship or product development (the surge in oil price). BP reported first half profits last month of £6.7 billion ($12 billion) – or £37 million ($66 million) a day. The Centrica power utility recorded first half profits of almost £1 billion ($1.8 billion) – and then raised gas prices 35 percent.

Second, the service it provides is a vital necessity. Recent hikes in gas and electricity prices mean average bills will soar to more than $2,500 a year. Retirees in particular will suffer – already more than 2 million older households live in 'fuel poverty' (they spend more than 10 percent of their income heating their homes).

"This is about fairness," says Gordon Lishman, director general of the Age Concern charity. "Energy companies are making healthy profits while people up and down the country are struggling to pay their bills and fuel poverty levels are escalating."

Individual energy companies are reluctant to be drawn on the issue before it has become formal government policy. "Tax is a matter for governments," said one BP spokesman, even though clearly its remittance is a matter for companies.

Tax may scare investors

But industry associations and experts cite several reasons why the energy sector is being unfairly treated, and why windfall taxes could be disastrous.

Mr. Porter says British electricity companies are readying £100 billion ($1.8 billion) of investment on new power stations, and that every pound "extorted" from them would have to be found elsewhere – presumably from customers. He adds that the tax would send a poor signal to global investors about the quality of the British investment environment. "[Britain] could be downgraded as a suitable place to invest."

For a generation, Britain has relied on North Sea oil and gas. With fields depleting, costs of extraction are rising.

"North Sea oil and gas fields are already proving harder and more expensive to tap and if the government is serious about Britain's energy producing capabilities then a move like this will not help," says Julian Lee, a senior energy analyst with the London-based Center for Global Energy Studies. Big companies like Shell and BP would in any case argue that Britain has no jurisdiction over the majority of their assets – and profits – which are generated overseas.

History provides few examples of a windfall tax with a happy ending. A US windfall tax in the 1980s raised far less than had been hoped for, and resulted in domestic oil production falling sharply. In Britain, a levy was imposed on privatized utilities by the new Labour government in 1997, though on that occasion the justification given was that these companies had been sold off too cheaply. A levy three years later, in the form of third-generation mobile licenses, hammered the telecom sector and deprived it of billions of pounds needed for investment.

A better solution, according to a group of local officials, would be to impose an annual levy on energy firms to fund a program to insulate British homes. That way, fuel bills would fall and companies would be able to spread the tax hit over the years.